Monday, September 17, 2012


Because of the procrastination of the idiots in Congress it is very difficult to know what to do tax-wise for 2012.

As of this writing, both the House and the Senate have passed some form of extender bill –

·      The House bill extends the “Bush” tax cuts in full for one more year.  It provides an AMT patch for 2012 and 2013, but does not address other expired “extenders” tax benefits.

·      The Senate bill extends the “Bush” tax cuts for all taxpayers with incomes below a certain threshold, which is "married couples with taxable income under $250,000 less the standard deduction and two personal exemptions; single taxpayers with taxable income under $200,000 less the standard deduction and one exemption; and heads of household with taxable income under $225,000 less the standard deduction and one exemption”.  The thresholds would be indexed for inflation after 2009.  It also provides an AMT patch for 2012 only and a one year extension of most of the popular “extenders” tax benefits.

What the idiots in Congress should do is extend everything that was in effect on December 31, 2011 (including those items already extended through December 31, 2012), except perhaps the 2% reduction in employee Social Security withholding, through December 31, 2013, including the indexed AMT patch and the rest of the temporary “extenders”, ASAP.

What I expect will happen is that they will wait until after the election to do anything about anything – and extend everything, at least for taxpayers under the suggested Senate income thresholds, and except perhaps the 2% reduction in employee Social Security, in December. 

In either case what the idiots must then do in 2013 is seriously address radical tax reform.

So for most taxpayers, and 90% of my 1040 clients, tax law for 2012 and 2013 will be the same as 2011.

But nothing is certain, and it may be a good idea to approach/consider financial transactions under the “worst case scenario” - nothing will be extended for 2013, and we will revert back to pre-Bush tax law.

One exceptional tax benefit that may disappear on January 1st is the 0% tax rate on long-term capital gains (and qualified dividends) for those in the 10% and 15% federal tax brackets.  If you will be in one of these tax brackets for 2012 you may want to think about selling stock and/or mutual fund shares held more than one year that would produce a gain before year-end. 

Consider this.  While a loss on a “wash sale” is not currently deductible there is nothing that stops one from recognizing a gain on such a sale.

A wash sale is one in which you sell stock or mutual fund shares and within 30 days before or after the sale you purchase(d) an identical, or substantially identical, block of stock or mutual fund shares.

For example - On September 20th you sell 100 shares of XYZ Company. On October 1st you buy 100 shares of XYZ Company. The September sale is considered a “wash sale”.

Let us say that the September sale of the 100 shares of XYZ Company yields a long-term capital gain of $2,000.  If your net taxable income is such that you fall within the 15% tax bracket the $2,000 capital gain will be taxed at 0% on the federal level.  Your $2,000 gain is federally tax-free.  You will, however, be subject to state income tax on the gain.

What you have done for the future is increased your tax basis in the investment in XYZ Company for federal and state income tax purposes.  So when you do eventually sell the shares you gain will be $2,000 less, or your loss $2,000 more.

If you have a sufficient amount available for the 0% tax rate for 2012 this may be a good idea whether or not this unique rate will expire on December 31st or will continue either temporarily or permanently.  This 0% rate is a great tax planning opportunity that should be taken advantage of to the max each year. 

Before doing anything you should contact your tax professional and work through the transaction on the Qualified Dividends and Capital Gains Worksheet for 2011 (in the 1040 instructions) using $35,350 for Single, $70,700 for Married, or $47,350 for Head of Household as the income threshold. 

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